Direct Selling Compensation Plans
Whether you’re launching a multi-level marketing (MLM) company or leading an established direct selling organization, the compensation plan is the foundation upon which the company’s success is built. So, if you’re asking, “what is the best MLM compensation plan?” you’re probably asking the wrong question. There’s no single compensation plan that’s the best. And there’s no single “if this, then that” formula for choosing the right direct selling compensation plan.
Instead, the question to ask is, “What is the MLM compensation plan that’s best for my business?” Once you frame the question this way, the deep-dive evaluation into direct selling genealogy trees and unilevel, binary, matrix, and hybrid MLM compensation plans can begin. The short answer to the “what is the MLM compensation plan that’s best for my business” question is, “It depends.” Discovering the complete answer comes from answering a series of follow-up questions about your direct selling business, your plans for growth, and the culture you want to create.
5 questions to identify the best MLM compensation plan
1. What are your MLM product and pricing strategies?
The products and services an MLM company sells are critical elements of its success for many reasons. The most obvious is that any product or service must appeal to enough customers to make the business viable. But market appeal isn’t enough. The product or service must also have enough perceived value that customers are willing to buy it at a price that enables the MLM company to manufacture the products, market them, compensate the field sales representatives who sell them, and still turn a profit that funds the company’s operations and growth.
As a result, the first thing MLM companies must do before finalizing a compensation plan is to thoroughly analyze the company’s product and pricing model. Fundamental to this analysis is understanding the cost of goods sold (COGS). COGS includes the expenses incurred to produce the goods or services the company sells. Examples of these costs include materials, labor, the wholesale price of goods that are resold, storage, and overhead.
Next, the direct selling company must determine the appropriate pricing strategy. The pricing strategy must establish a retail sales price that includes enough margin for running the business and paying commissions and incentives to MLM representatives. For MLM companies, pricing that achieves a 5X margin over the cost of goods is a good rule of thumb. When analyzing pricing options, consider whether you plan to offer preferred pricing to top customers as well as pricing levels for field sales representatives.
2. What is your direct sales strategy?
Every company wants to sell as many products as it can, but that doesn’t just happen. Sales success comes from understanding the target customer, the overall market, and the competition. It also comes from creating a sales model that aligns with all of these things – plus the company’s product and pricing strategies.
The first thing to consider is the ease of sale based on the type of purchase you’re asking a customer to make. Products and services can range from meeting a customer’s basic day-to-day needs through high-end, nice-to-have items. They can be things that are depleted with use and require frequent replenishment, such as cosmetics or nutritional products. Or they can be things that are meant to last, such as jewelry, clothing, or furnishings. The product category and the ease of the customer’s purchase decision are essential factors in determining an MLM company’s sales model.
Today, direct selling companies have a variety of effective options for how they present their products to the market. These include one-to-one in-person sales, Ecommerce websites, social media selling, and party-based selling, both in-person and virtual. Across these go-to-market approaches, the training and support provided to MLM sales representatives are crucial. Optimize your MLM software’s capabilities to provide accessible journey-based onboarding and training, as well as deliver tools and support that streamline the operational aspects of building and managing an MLM business.
When selecting an MLM sales model, think about the types of sales representatives who will be successful. This will inform who is recruited and how commissions and incentives are structured in order to drive the necessary selling behaviors. Recognize that people join MLM organizations for different reasons. Some approach it as a full-time career, but most see it as a part-time way to supplement their income. A company’s sales strategy needs to reflect the motivations of its sales team and incorporate activity requirements and rewards that inspire engagement and consistent, ongoing sales activity.
3. What is your MLM brand story?
An MLM’s brand plays a pivotal role in determining its compensation plan because a strong, recognized brand can have a major impact on creating customer awareness, attracting new representatives, and driving retail sales.
An MLM brand is “the perception of a product, service, experience, or organization in the market.” Impactful MLM brands go beyond a logo or product line to deliver consistent messages, visual imagery, and the emotional identity that the company wants to create among its customer and sales representative audiences. Today, an MLM company must establish and maintain its brand messaging and look and feel across digital platforms, product experiences, and sales interactions that occur in-person, virtually, and through social media.
At the core of a compelling brand story is the company’s unique reason for being. The story encompasses the differentiators that make an MLM company stand out from other direct selling organizations as well as traditional retail competitors. The brand story gives customers the reasons why they choose to purchase from their MLM representative and continually reinforces that decision.
For direct selling companies, defining a brand strategy should be an integrated part of choosing a compensation structure. When companies are able to consistently present their brands across the range of experiences, they see an average 33 percent increase in revenues over companies with less defined, weaker branding.
4. Which MLM compensation structure best aligns with your strategies?
Once an MLM company has detailed product, pricing, sales, marketing, and brand strategies mapped out, it’s time to consider the different MLM compensation plan structures. There are many direct selling genealogy structures to choose from, so it’s possible to ensure close alignment with both short- and long-term growth strategies. However, it’s a big decision. While a compensation plan will evolve as a company grows, it’s not easy to change the foundational MLM genealogy tree.
Compliance is also an important factor in the evaluation of compensation options. To comply with FTC requirements for direct selling organizations, a compensation plan must primarily focus on rewarding retail sales, not the recruiting of representatives.
Here’s an overview of the main MLM compensation plan structures and the types of situations they fit.
- Unilevel compensation plans are simple to explain and administer. In a unilevel compensation structure, all newly recruited representatives are placed in a single level – called the frontline – below their sponsor representative. There’s no limit to the width of the frontline, and the company sets a limit to the depth of the downline levels that qualify for payment. Typically, unilevel compensation plans pay MLM representatives varying percentage commissions for three to seven levels of the downline team’s sales. The plan’s simplicity is a plus for recruiting but can make it difficult to pay top-performing leaders adequately when their downlines are much deeper than the plan’s payout parameters.
- Binary compensation plans have a two-by-two genealogy structure called a “two-leg” downline. This means that each sales representative has two downlines. After filling their first two spots, additional recruits are called “spillover” because they fill in the levels below the frontline. In a binary compensation plan, the depth is unlimited. Commissions – typically a percentage of sales or a fixed dollar bonus based on sales volume – are determined by the lesser earning leg or “pay leg.” The leg with the higher sales volume is called the “reference leg.” In a binary compensation structure, the intention is to inspire teamwork with MLM representatives working together to optimize the performance of both legs in order to increase their compensation. Binary compensation plans work best for MLM organizations that want to emphasize recruiting and autoship purchasing of products.
- Matrix compensation plans establish a fixed downline width and depth for payouts. Widely used by MLM companies, matrix plan structures are chosen to drive balanced team growth. The MLM organization can determine the width and depth based on its objectives. For example, in a 3×5 matrix plan, the width is fixed at three, meaning a sponsoring representative can have three people in her frontline. From there, additional reps spill over to fill out subsequent levels. The representative’s payout is determined by the production within the five-level depth parameter. Along with encouraging teamwork, matrix compensation plans help promote strategic recruiting as representatives seek to maximize their earnings.
- Hybrid compensation plans enable MLM companies to bring together elements from different MLM genealogy structures. Most often, hybrid compensation plans combine a binary structure for initial sales payouts and then a unilevel structure for ongoing sales volume. A hybrid compensation gives the MLM company added flexibility to design a plan that aligns with the organization’s growth objectives. In addition, this type of plan provides higher initial compensation rates as a motivator for new representatives.
5. What other recognition and incentives do you want to include in your MLM compensation plan?
Commissions are one facet of incenting and rewarding a direct sales team. But effective MLM compensation plans also build in ranks, bonuses, and contests to drive specific sales and recruiting behaviors tied to the company’s growth objectives. Consider the following components when designing and enhancing your company’s compensation program.
- Ranks enable high-performing representatives to earn recognition in the form of titles and additional compensation opportunities. When defining rank criteria, aim to create a realistic stretch goal for a significant portion of the field sales team. You don’t want the criteria to be too easy to achieve, which can lessen the recognition, and you don’t want a rank to be too difficult to achieve, which could have a demotivating impact.
- Bonuses serve as incentives that both motivate and reward specific behaviors. One common example is a starter bonus which provides an immediate goal for new representatives and recognizes them for achieving their initial sales. When MLM representatives taste sales success early, they stay engaged and active. In fact, research shows that when an MLM representative makes her first sale within two weeks of joining an organization, that rep remains with the company for an average of six years, which is well above average retention rates.
- Contests are a fun way to inspire short-term activity, such as launching a new product line, promoting new – or slower-moving – products and services, and recruiting new representatives. One popular contest is based on new customer acquisition and rewards representatives for the number of new retail customers they can attract and sell to within a defined period.
The answers to these five questions will provide a deep understanding to inform the evaluation and ongoing management of your MLM company’s compensation plan. As you explore the options, tap into expert industry partners like ByDesign Technologies. With 20+ years of experience in the MLM industry, ByDesign provides MLM software solutions and expert insights that help MLM organizations deliver effective compensation plans and achieve their growth goals. Learn more at ByDesign.com or contact us to schedule an mlm software consultation.
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